Sunday, November 28, 2010


I discussed this a few weeks back in class ...

The Greenspan Commission (yes, Reagan raised taxes)
It was early in the 1980s and Ronald Reagan was just elected president. He was staring record deficits in the face. Part of the problem was tied to his trickle-down, tax cuts for the rich, policies which were going to drain income from the national treasury. The other problem was tied to increased defense expenditures and anticipated hikes in social security costs down the road.

Because tax cuts and increasing defense spending were the heart of President Reagan's policy prescriptions, he focused on social security spending as a way to deal with looming budget shortfalls. So he appointed a blue ribbon panel to study the social security problem - which was Reagan's way of dealing with his budget deficit mess. The panel was chaired by future Federal Reserve chair, Alan Greenspan. Thus was born the Greenspan Commission (the National Commission on Social Security Reform).

The Greenspan Commission was driven by two realities. They had to buy into Reagan's assumption that trickle-down economic policies would reduce budget deficits (even after 1980 presidential candidate George H.W. Bush exposed it as "voodoo economics"). Then they had to accept that President Reagan was going to increase defense spending. As a result the Greenspan Commission was told to ignore any consideration of across the board tax increases, and to not consider touching defense expenditures, as a way of fixing the budget.

What emerged from the Greenspan Commission were a set of policy prescriptions that effectively doubled social security (FICA) taxes on America's middle-class and their employers.

In addition, retirees had to accept postponement of cost-of-living increases while some employees saw the date when they could begin receiving benefits deferred. President Reagan signed these recommendations, along with others, into law in 1983.

Left unsaid throughout the entire process was how social security, a pay-as-you-go program, had been generating program surpluses for years. Part of the reason for ignoring these program surpluses is because discussing how to protect those surpluses (in a "lockbox") would have drawn attention to the fact that the federal government had been using these surpluses to shore up budget expenditures and deficits over the previous decades.

Put another way, the federal government was sucking off of the social security program - and owed the social security program money (as it does now) - but didn't want to admit it.

The Greenspan Commission ignored this inconvenient reality, and decided to start the clock over on it's own terms. This meant that America's middle-class would pay for previous deficits, PLUS President Reagan's signature tax-cuts-for-the-rich program PLUS rising defense expenditures. America's wealthiest would get a pass.

The Boskin Commission (wishing inflation away to the cornfield)
Fast forward to 1995. With Reagan and Bush era policies raising our national debt Washington's elites were once again concerned about government expenditures. Specifically, they were concerned with a national debt that had quadrupled in 12 years. But instead of focusing on rising defense expenditures and foolish tax cuts for the rich policies, policy makers once again looked at anticpated social security costs (again ignoring present program surpluses), and focused on mandated cost-of-living-allowances (COLAs).

Since social security recipients receive annual increases in their benefits, which are tied to the official rate of inflation (COLAs), the U.S. Senate decided to put another commission together - the Boskin Commission. But this commission was tasked with looking at how inflation was measured. They wanted to see if they could slow down social security benefits by adjusting COLA increases downward.

If this sounds confusing your instincts are correct. Their real goal was to cut benefits, without nobody noticing. Guess what? The Boskin Commission found a problem.

Let's reemphasize this point. The Boskin Commission's real goal wasn't to find a new mouse trap for measuring inflation. It's goal was to find a way to reduce social security payments, and to do it in a way that would confuse everyone enough so the recipients wouldn't notice (or give up trying to figure it out). Here's how they did it.


All of us know that home prices doubled in a short period of time before the markets collapsed. We also know that crude oil prices doubled, tripled, and then quadrupled over the past 10 years. Anyone who goes food shopping know what's happened to food prices. Then we have insurance premiums, medical costs, co-pays, education and other service fees that we have to pay, especially as government budgets and services are cut back or privatized.

Yet, over the past 10 years, the consumer price index (CPI), which measures our nation's inflation rate, has barely budged. Here, check it out.

Now, do you believe that your household costs have actually increased by an average of 2-3% per year? Neither do I, and I have the bills to prove it. I'm sure you do too.

Here's what's been happening.

Because of the Boskin Commission's "hedonic" adjustments we don't count the $1,000 you paid for your new computer as part of our inflation numbers. Why? Because since it's twice as fast as your old one the government concludes that you really paid half as much for it. The same goes for figuring out how much your car and refrigerator cost.

Think of it this way. In the government's eyes your $1000 computer only cost $500. This is akin to saying, "Now that I'm buying $3.00 hamburgers, which give me twice the calories, I'm going to start calculating my food budget at half the price." Huh? Yeah, that's what I thought too.

Look, if you double up on the calories for the same amount of money you're not always doing yourself any favors. Oh, and you're still spending $3.00.

Then we have the substitutions.

Because of the Boskin Commission, when the government sees the price of steak go up it assumes that consumers replace steak with chicken, or some other meat-like substance (note: the "core CPI" actually excludes food & energy prices). Pesky prices according to the Boskin Commission don't count if you don't really want them to count.

But, in the real world, you and I know the price of steak went up.

In this way, with hedonics, substitutions, and many other accounting tricks, the Boskin Commission helped reduce inflation in America. Like the little boy on the Twilight Zone segment who wished things he didn't like into the cornfield, the Boskin Commission's recommendations allowed America's policymakers to wish inflation away.

And just like that, America's retirees and middle-class wage earners saw the size of their social security checks, and other raises, stagnate as real prices rose in America.

Oh, as an aside, with official (but artificial) low rates of inflation Alan Greenspan had his green light to keep on lowering interest rates. This, as we all know, contributed to the housing boom and the markets subsequent collapse. Thank you Boskin Commission.

President Obama's Deficit Commission (watching hope take a dive)
Now we have President Obama's Deficit Commission, and it's deficit reducing proposals. As should be expected, nothing is said about 60+ years of using social security surpluses for current expenditures ... nothing is said about three decades of unfunded trickle-down policies ... nothing is said about walking back Bush's tax cuts for the rich policies ... nothing is said about unfunded bailouts for Wall Street that now reach into the trillions of dollars ... nothing is said about unsustainable and reckless war projects.

So, guess who's going to pay through the nose on this one?

So much for keeping hope alive.

Whether it's tax increases on the middle-class (Greenspan), wiping out cost of living increases and ignoring the impact of inflation (Boskin), or turning our back on what's really driving national debt loads (Obama's Deficit Commission), America's middle-class is being made to pay for 30 years of unfunded tax cuts, corporate bailouts, and reckless wars.
All of this goes a long way in helping to explain the widening wealth and income gaps that exist in America. I think we need another commission to study the issue ...

- Mark

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